Sales tax is a form of tax that is added to the purchase of retail goods and services. Sales taxes are primarily administered by state and local governments and are applied to a wide range of items, from clothing to home goods to car parts. Sales taxes can vary widely by state, resulting in different overall costs for items depending on the city or municipality where they are purchased.
Administration of Sales Tax
Sales tax is placed on goods at the time of purchase. Although customers pay sales tax, it is collected by the businesses that sell the goods, and they must report the tax to the Internal Revenue Service. The federal government does not administer sales tax; rather it is determined by state and local governments. Currently forty-five states have a sales tax. Only Alaska, Delaware, Montana, New Hampshire, and Oregon do not. Most state sales taxes are general in nature, meaning that they apply to the sale of most goods, but states also have the option to impose additional selective sales taxes on the sale of particular items.
California currently has the highest state sales tax in the country, at 7.5 percent. However, many localities may charge a higher local sales tax than this, varying from one percent to as high as ten percent.
What Can Be Subject to a Sales Tax?
Not all goods and services are taxed by sales taxes. Additionally, not all types of transfers of goods are taxable. Real property, such as land, is not subject to the sales tax, nor are large bulk sales such as the sale of an entire business or operation. In many states, while food sold in restaurants or in grocery stores for immediate consumption, such as an on-site café, are subject to sales tax, food purchased in a grocery store that will be consumed at home are not subject to the same tax.
Additionally, goods sold for retail are to be taxed only once. This means that those who buy and re-sell typically are not required to pay sales tax on their initial purchase, as the tax will be paid by the consumer who ultimately buys the good. Likewise, in many cases, where parts are purchased for manufacturing to be made into one larger item, these parts are often exempt from sales tax, although the ultimate good that they create is not. Finally, items sold by charities or other exempt organizations are generally also exempt from the sales tax.
Sales Tax and Multi-State Sellers
One unique issue that arises with sales tax is its applicability to retailers or other entities that sell in multiple states or who have only a small presence in a state. Under the Commerce Clause of the United States Constitution, states are not permitted to impose a sales tax on every out-of-state seller. Instead, the seller must have a sufficient presence in the state such that it can be said to have a nexus with the state. This could include the presence of a physical store, advertising in the state, or other substantial connections.
Another complicated issue for sales tax administrators is the prevalence of Internet sales. Currently, most states do not impose sales taxes for Internet sales given the complexity of determining which state’s tax laws would apply, and the difficulty for online retailers in applying the varied sales taxes of states and municipalities. Currently, Congress is considering legislation that would allow for states to collect sales taxes on purchases made online, although it is not yet entirely clear as to how this would be done.